Venture Capital for Latin American Unicorns Dries Up

The slowdown in venture capital investment follows the global trend and is on track to see the sharpest decline in two decades

Venture capital financing for Latin American unicorns is drying up
By Ezra Fieser
December 20, 2022 | 10:15 AM

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Bloomberg — The deluge of venture capital that poured into late-stage Latin American tech companies in recent years has dried up, forcing some of the region’s most promising startups to fire staff, rethink growth plans and turn to bank loans for funding.

After a series of record years in which investors minted more than two dozen companies valued at $1 billion or more, venture capital has all-but vanished for more-established startups. Late-stage funding plummeted 92% in the third quarter compared to the same period a year ago, according to the Association for Private Capital Investment in Latin America (LAVCA).

“I haven’t seen a growth round from a single company from Latin America for months,” said Eric Reiner, founder and managing director of Vine Ventures LP, which opened a $140 million fund this year for investments in Latin America, Israel and the US. “When capital dries up, investors become more sophisticated and picky. A lot of these companies will have to show they’re real businesses.”

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The slowdown tracks a global decrease in venture capital spending, which is on pace for the sharpest drop in more than two decades. For Latin America, it comes just as the startup industry was taking off: As recently as early this year, investors were quick to write checks, spawning waves of fast-growing companies in everything from financial technology to real estate.

I still think it’s reasonable to be optimistic for the region. But we have seen corrections. It’s logical and natural and reflects that investors are demanding companies show profitability.”

Karin Tenenboim, an investment manager at Newtopia VC

Overall, venture financing to the region last quarter dropped by more than three-fourths from a year earlier to $1.15 billion, according to LAVCA data.

High inflation and rising interest rates have led funds to turn away from riskier sectors. Instead of making investments based on growth projections, venture capitalists said they want companies to prove a clear path to turning a profit.

“I still think it’s reasonable to be optimistic for the region. But we have seen corrections. It’s logical and natural and reflects that investors are demanding companies show profitability,” said Karin Tenenboim, investment manager at Newtopia VC, a firm based in Argentina that focuses on the region. “It’s a different mindset.”

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Companies from Mexico to Argentina have halted expansion plans and cut staff to preserve cash and improve margins. In recent weeks:

  • Loft, a Brazilian property technology company that was valued at $2.9 billion last year, said it reduced 12% of its workforce this month, the third time it cut staff this year. A spokesperson said the company’s valuation has not been affected.
  • In Colombia, Muni, a commerce platform that had expanded to Mexico and Brazil and raised $20 million in September, said it closed down.
  • Mexican crypto exchange Bitso, valued at $2.2 billion last year after raising $250 million in a round led by Tiger Global, cut staff in the wake of the collapse of FTX.
  • Jokr, a rapid delivery startup valued at $1.2 billion a year ago, pulled out of Santiago, Chile, and Medellin, Colombia, a company spokesperson said. In June, the company pulled back from the US to focus on Latin America.

Debt deals

Héctor Jirau, director of operations and investment at Parallel 18, a tech accelerator in Puerto Rico, said that the slowdown has prompted founders and investors to structure deals differently, including using more debt.

Banks like Goldman Sachs Group Inc. and Citigroup Inc. are moving into the space. Despite rising interest rates, startups took out $1.3 billion in credit lines from traditional banks, according to LAVCA.

“There’s definitely been an increase in the availability of more novel structures for financing startups in Latin America,” said Martin Pustilnick, co-founder and CEO of Mundi, a startup that works with Mexican exporters.

Mundi has borrowed $100 million to fuel its growth, which has given it more flexibility as lenders are less concerned with profitability in the short term, he said. “There will be a big opportunity for debt for the next few years as equity funds are pulling back from the market.”

--With assistance from Nicolle Yapur.

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